2Explain the role of stock in financing a corporation Learning Objective 11-1Explain the role of stock in financing a corporationLearning objective number 11-1 is to explain the role of stock in financing a corporation.
3Corporate OwnershipThe major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership.Simple to become an ownerEasy to transfer ownershipProvides limited liabilityPart IThe corporate form of organization has several advantages. The major advantage is the ease of raising large amounts of money because both large and small investors can participate in corporate ownership.It is simple to become an owner of corporate shares of stock and it is just as simple to sell the shares. Organized exchanges, such as the New York Stock Exchange, maintain markets in which shares in thousands of companies are bought and sold each business day. Stockholders’ losses are limited to the amount invested in the corporation. Corporate creditors cannot make claims on the personal assets of shareholders to satisfy corporate debt.Part IICorporations are entities created by law that exist separately from their owners and that have rights and privileges. As separate entities, corporations can:Own assets.Incur liabilities.Sue and be sued.Enter into contracts. Stockholders are not agents of the corporation and cannot enter into contracts on the corporation’s behalf.Because a corporation is a separate legal entity, it canOwn assets.Incur liabilities.Sue and be sued.Enter into contracts.
4Corporate Ownership Voting rights. Dividends. Residual claims. Stockholder BenefitsDividends.Residual claims.Part IIn addition to voting on important issues at annual meetings, stockholders have other benefits.Part IIStockholders have the right to receive dividends when declared by the board of directors.Part IIIIn the event of liquidation, stockholders share, according to their percentage ownership, in any remaining assets after creditors are paid.Part IVExisting shareholders may be given the first chance to buy newly issued shares of stock before it is offered to others.Preemptive rights.
5Corporate OwnershipUltimate control of a corporation rests with the stockholders. At their annual meeting, stockholders elect the Board of Directors and vote on important management issues facing the company. The members of the board of directors hire the executive officers of the corporation. Finally, officers of the corporation empower others to hire needed employees.
6Equity Versus Debt Financing Advantages of equity and debt financing.Advantages of equityEquity does not have to be repaid.Dividends are optional.Advantages of debtInterest on debt is tax deductible.Debt does not change stockholder control.Part IEquity financing has some advantages when compared to debt financing. First, equity financing does not have to be repaid as does debt. Second cash dividends to stockholders are optional, whereas interest payments on debt are mandatory.Part IIHowever, debt financing also has some advantages. First, interest payments to creditors are tax deductible, but dividend payments to stockholders are not. Second, selling additional shares of stock can dilute the ownership percentage of current stockholders, but additional debt does not change stockholder control.
7Explain and analyze common stock transactions. Learning Objective 11-2Explain and analyze common stock transactions.Learning objective number 11-2 is to explain and analyze common stock transactions.
8Common Stock Transactions Stockholders’ EquityContributed CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive IncomePart IA company’s Stockholders’ Equity section of the its balance sheet can include multiple items.Part IIContributed Capital reports the amount of capital the company received frominvestors’ contributions, in exchange for the company’s stock. For this reason,contributed capital represents paid-in capital.Part IIIRetained Earnings reports the cumulative amount of net income earned by thecompany less the cumulative amount of dividends declared since the corporationwas first organized. Retained Earnings represents earned capital.Part IVTreasury Stock reports shares that were previously owned by stockholders buthave been reacquired and are now held by the corporation. To fully understandtreasury stock, it’s helpful to follow stock transactions through from authorizationto issuance and repurchase, as we do in the following slide.Part VAccumulated Other Comprehensive Income reports unrealized gains and losses,which are temporary changes in the value of certain assets and liabilities thecompany holds. They can relate to pensions, foreign currencies, and financialinvestments, such as National Beverage’s contracts to stabilize the cost of itsaluminum cans.
9Authorization, Issuance, and Repurchase of Stock AuthorizedSharesOutstanding shares are issued shares that are owned by stockholders.Issued shares are authorized shares of stock that have been distributed to stockholders.Unissued shares of stock are shares that have never been distributed to stockholders.UnissuedSharesTreasuryOutstandingThe maximum number of shares of capital stock that can be issued to the public.IssuedSharesPart IThere are several terms related to stock that we need to understand. Authorized shares are the maximum number of shares of stock that can be issued to the public. The number of authorized shares is identified in the corporate charter of the corporation that is issued by the state.Part IIAuthorized shares can be classified as either issued or unissued. Issued shares are authorized shares of stock that have been distributed to stockholders. Unissued shares are authorized shares of stock that have never been issued to stockholders.Part IIIIssued shares can be classified as either outstanding shares or treasury shares.Part IVOutstanding shares are shares that are currently owned by stockholders.Part VTreasury shares are shares that were once owned by stockholders but the corporation repurchased the shares in the stock market. Now, the corporation is the owner of those shares.Treasury shares are issued shares that have been reacquired by the corporation.
10Authorization, Issuance, and Repurchase of Stock Here you see an example of the Stockholders’ Equity portion of National Beverage Corporation’s Balance Sheet. The three accounts, Common Stock, Additional Paid-in Capital, and Retained Earnings, are shown. Preferred Stock is a category of stock with special rights that we will discuss later. Notice the amount of detail disclosed for the Common Stock account. Par value is one cent per share. It is not unusual for par values to be as low as one cent per share. We will discuss the concept of par value later. The corporate charter authorizes a total of 75,000,000 shares of stock that can be issued, 50,300,000 of which have been issued. Of those shares issued, shares costing $18,000,000 have been reacquired by the company and are shown as treasury stock.
11Par value is typically a very nominal amount such a $0.01 per share. Stock AuthorizationPar value is typically a very nominal amount such a $0.01 per share.Par value is an arbitrary amount assigned to each share of stock when it is authorized.Market price is the amount that each share of stock will sell for in the market.Part ICommon stock normally has a par value which is usually a very small amount, such as one cent per share.Part IIPar value is an arbitrary amount assigned to each share of stock in the corporate charter. Par value is not related in any manner to market value which is the selling price of a share of stock.
12Some states do not require a par value to be stated in the charter. Stock AuthorizationSome states do not require a par value to be stated in the charter.No-par StockIn addition to par value stock, some states permit no-par value common stock.
13Stock Issuance Initial public offering (IPO) The first time a corporation issues stock to the public.Seasoned new issueSubsequent issues of new stock to the public.Part IAt the initial public offering, shares of stock are issued to the public for the first time, usually through major securities brokerage firms with retail offices in cities across the country.Part IIAt a later date, the company may wish to raise additional capital with another issue of stock to the public. This is referred to as a seasoned new issue.National Beverageissues stock.
14Most issues of stock to the public are cash transactions. Stock IssuanceMost issues of stock to the public are cash transactions.National Beverage issued 100,000 shares of $0.01 par value common stock for $10 per share.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash +1,000,000Common Stock ,000Additional Paid-InCapital ,000Part IWhen par value stock is issued for cash, the common stock account is credited for the par value of the stock sold. Remember that par value and market value are not related. The difference between the par value of the stock and the market value of the stock is credited to additional paid-in capital.Let’s record the entry for National Beverage Corp. for the issuance of 100,000 shares of one cent per share par value stock, sold for $10 per share in cash.Part IIThe transaction would affect the accounting equation by increasing assets (Cash) by $1,000,000 and increasing Stockholders’ Equity by $1,000,000 (Common Stock $1,000 and Additional Paid-in-Capital $999,000.Part IIIWe debit Cash for the market value of the stock issued: 100,000 shares times $10 per share. Next, we credit Common Stock for the total par value of the shares issued: 100,000 shares times one cent per share. And last, we credit Additional Paid-in Capital for the excess of market value over par: $999,000.2Recorddr Cash (+A) (100,000 x $10)cr Common Stock (+SE) (100,000 x $0.01)cr Additional Paid-In Capital (+SE)(1,000,000 – 1,000)1,000999,0001,000,000
15Stock Exchanged between Investors Transactions between two investors do not affect the corporation’s accounting records.I’d like to buy 100 shares of National Beverage stock.I’d like to sell 100 shares of National Beverage stock.Once shares of stock are owned by the public, they may be bought and sold in the open market. Such transactions do not involve the company or its accounting records. The millions of shares that are bought and sold on the New York Stock exchange each business day are examples of this type of transaction.
16Stock Used to Compensate Employees Employees pay packages can include stock optionsGives the employees the option to acquire company stock at a predetermined pricePart IStock can be used as a way to compensate employees and to encourage employees to work hard for a corporationPart IIEmployee pay packages often include a combination of base pay, cash bonuses, and stock options.Part IIIStock options give employees the option of acquiring the company’s stock at a predetermined price, often equal to the then-current market price.Part IVIf employees work hard and meet the corporation’s goals, the company’s stock price will increase.Part VEmployees can then exercise their option to acquire the company’s stock at the lowerpredetermined price and sell it at the higher price for a profit.If the employees work hard and meet the corporation’s goals the stock price will increase.Employees can then exercise their option to acquire stock at the lower predetermined price and sell it at the higher price for a profit.
17Repurchase of Stock A corporation repurchases its stock to: Distribute excess cash to stockholders.Send a signal that the company believes its stock is worth acquiring.Obtain shares to reissue for the purchase of other companies.Obtain shares to reissue to employees as part of stock option plans.Corporations often buy their own stock back in the market. They do this because they want to distribute excess cash to stockholders, they believe the shares are worth acquiring, to increase their shares needed to use in the acquisition of another company, and to increase shares for use in employee stock option plans.
18Repurchase of Stock National Beverage repurchases its own stock (Treasury stock)StockholdersEmployeeEmployee compensation package includes salary plus stock options.Stock options allow employees to purchase stock from the corporation at a fraction of the stock’s market price.Part INational Beverage repurchases its own shares from current stockholders. The repurchased shares are called treasury stock.Part IIAt a later date, National Beverage plans to use the treasury stock as part of an employee compensation plan. National Beverage grants options to employees.Part IIIStock options will allow employees to purchase the shares of the company’s stock at a less than the stock’s market price.
19No voting or dividend rights Repurchase of StockTreasurystock is not an asset.No voting or dividend rightsContra equity accountPart IDividends are not paid on treasury stock, and a corporation holding its own stock cannot vote using these shares at the annual meeting.Part IITreasury stock is not an asset. It is reported in the Stockholders’ Equity portion of the balance sheet as a reduction from total equity.Part IIITreasury stock is usually recorded at the cost to purchase it, and the total cost of all shares of treasury stock held by the company is the amount reported as a reduction in Stockholders’ Equity.When stock is reacquired, the corporation records the treasury stock at cost.
20Repurchase of StockNational Beverage reacquired 50,000 shares of its common stock at $25 per share.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash -1,250,000TreasuryStock (+xSE) -1,250,000Part INational Beverage purchased 50,000 of its own shares in the market for $25 per share, or $1,250,000.Part IIThe transaction would affect the accounting equation by decreasing assets (Cash) by $1,250,000 and decreasing Stockholders’ Equity (increasing Treasury Stock) by $1,250,000.Part IIIThe entry includes a debit to Treasury Stock and a credit to Cash for $1,250,000, the amount of the purchase. The Treasury Stock would be reported on the Balance Sheet in the Stockholders’ Equity section as a reduction from total Stockholders’ Equity.2Recorddr Treasury Stock (+xSE, -SE)cr Cash (-A)1,250,000
21Reissuance of Treasury Stock National Beverage reissued 5,000 shares of the Treasury Stock at $28 per share.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash +140,000Treasury Stock (-xSE) +125,000Additional Paid-InCapital ,0002Recorddr Cash (+A) (5,000 x $28)cr Treasury Stock (-xSE, +SE) (5,000 x $25)cr Additional Paid-In Capital (+SE)[5,000 x ($28 - $25)]125,00015,000140,000Part ILater, National Beverage reissued five 5,000 shares of the treasury stock for $28 per share. Remember that the original cost of the treasury stock was $25 per share. Part IIThe transaction would affect the accounting equation by increasing assets (Cash) by $140,000 and increasing Stockholders’ Equity by $140,000 (decreasing Treasury Stock by $125,000 and increasing Additional Paid-in-Capital by $15,000.Part IIIThe entry would include a debit to Cash for $140,000, a credit to Treasury Stock for $125,000, and a credit to Additional Paid-in Capital for $15,000. The credit to Treasury Stock is the original cost of $25 per share times the 5,000 shares sold. The difference between the selling price and the cost of the Treasury Stock is credited to Additional Paid-in Capital. In this example that amount is $15,000. No profit or loss is recognized on treasury stock transactions.No profit or loss is recognized on treasury stock transactions.
22Learning Objective 11-3Explain and analyze cash dividends, stock dividends, and stock split transactions.Learning objective number 11-3 is to explain and analyze cash dividends, stock dividends, and stock split transactions.
23Dividends on Common Stock Declared by board of directors.Not legallyrequired.Creates liability at declaration.Requires sufficient Retained Earnings and Cash.Cash dividends are declared by the board of directors. There is no legal obligation to declare a cash dividend, but once declared, there is a legal obligation to pay the dividend. Most corporations that pay cash dividends pay them quarterly. To pay a cash dividend, a corporation must have two things: Sufficient retained earnings to absorb the dividend without going negative and Enough cash to pay the dividend.
24Dividends DatesThere are three important dates to remember when discussing dividends: The declaration date. The date of record. The date of payment.The date of declaration is the date the directors declare the dividend. At this time a liability is created and must be recorded. The date of record is important because it is the date when the corporation determines the owners of record who will receive the dividend. No entry is required in the accounting records on this date. The date of payment is the date the corporation pays the dividend to the stockholders who owned the stock on the record date.
25Dividends DatesNational Beverage declares an $2.30 dividend on each share of its 46,200,000 shares of common stock outstanding.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+DividendsPayable ,260,000Declared (+D) ,260,000Part INational Beverage declares an $2.30 dividend on each of its 46,200,000 shares of common stock outstanding.Part II.The transaction would affect the accounting equation by increasing Liabilities (Dividends Payable) by $106,260,000 and decreasing Stockholders’ Equity by $106,260,000 (increasing Dividends Declared).Part IIIThe entry at the date of declaration includes a debit to Dividends Declared and a credit to Dividends Payable for $106,260,000. Dividends Declared is a temporary account that is closed to Retained Earnings at the end of the year.2Recorddr Dividends Declared (+D, -SE)cr Dividends Payable (+L)106,260,000
26Dividends DatesNational Beverage paid the previously declared $2.30 dividend on its shares of common stock outstanding.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash -106,260,000DividendsPayable ,260,000Part INational Beverage paid the previously declared $2.30 dividend on its 46,200,000 shares of common stock outstanding.Part IIThe transaction would affect the accounting equation by decreasing Liabilities (Dividends Payable) by $106,260,000 and decreasing Assets (Cash) by $106,260,000.Part IIIThe entry on the date of payment includes a debit to Dividends Payable and credit to Cash for $106,260,000, the total amount of cash paid to the owners of record.2Recorddr Dividends Payable (-L)cr Cash (-A)106,260,000
27Distribution of additional shares of stock to stockholders. Stock DividendsDistribution of additional shares of stock to stockholders.No change in total stockholders’ equity.All stockholders retain same percentage ownership.No change in par values.Part IA stock dividend is a distribution of additional shares of stock to stockholders. All stockholders retain the same percentage ownership. The stockholders have more shares of stock representing the same ownership as they had before the stock dividend.Part IIThere is no change in total stockholders’ equity.Part IIIPar value per share does not change.Part IVCorporations issue stock dividends to:Remind stockholders of the accumulating wealth in the company.Reduce the market price per share of stock to make the shares more affordable for investors to purchase.Signal that the management expects strong financial performance in the future.Corporations issue stock dividends to:Remind stockholders of the accumulating wealth in the company.Reduce the market price per share of stock.Signal that the company expects strong financial performance in the future.
28Record at current market value of stock. Record at par value of stock. Stock DividendsSmallLargeStock dividend < 20 – 25%Stock dividend > 20 – 25%Record at current market value of stock.Record at par value of stock.Part IA stock dividend can be classified as small or large. A small stock dividend is a distribution of stock that is less than percent of the outstanding shares. Small stock dividends are recorded at the market value of the stock.Part IIA large stock dividend is a distribution of stock that is greater than percent of the outstanding shares. Large stock dividends are recorded at the par value of the stock.Let’s look at the entry to record a large stock dividend.The journal entry moves an amount from Retained Earnings to other equity accounts.
29Stock DividendsNational Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock dividend.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Retained Earnings -76,000Common Stock ,000Part INational Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock dividend.Part IIThe transaction would affect the accounting equation by decreasing Retained Earnings by $76,000 and increasing Common Stock by $76, there is no change in total Stockholders’ Equity.Part IIINational Beverage would debit Retained Earnings and credit Common Stock for the number of shares issued times the par value of the stock. Twenty percent of 38,000,000 shares is 7,600,000 shares, so 7,600,000 shares times the $0.01 par value per share is $76,000.2Recorddr Retained Earnings (-SE)cr Common Stock (+SE)76,000
30A stock split creates more pieces of the same pie. Stock SplitsAn increase in the number of shares and a corresponding decrease in par value per share. Retained earnings is not affected.A stock split creates more pieces of the same pie.Assume that a corporation had 1,000,000 shares of $0.01 par value common stock outstanding before a 2–for–1 stock split.Part IStock splits are not dividends. While they are similar to a stock dividend, they arequite different in terms of how they occur and how they affect the stockholders’ equity accounts. In a stock split , the total number of authorized shares is increased by a specified amount, such as 2-for-1. In this instance, each issued share is called in and two new shares are issued in its place. Cash is not affected when the company splits its stock, so the total resources of the company do not change. It’s just like taking a four-piece pizza and cutting each piece into two smaller pieces.Part IIBefore the two-for-one split, this company had 1,000,000 shares of $0.01 per share par value stock outstanding.Part IIIAfter the two-for-one split, the number of shares doubled and the par value was cut in half. Notice that an accounting entry is not required, and that retained earnings is not reduced. In many respects a 100 percent stock dividend and a two-for-one stock split result in similar impacts to the price per share in the stock market. The stock split usually requires more administrative tasks to call in and reissue stock certificates.
31Comparison of Distributions to Stockholders Part IHere you see the components of the Stockholders’ Equity section of a corporate Balance Sheet before showing the effects of a 2-for-1 stock split, a 100 percent stock dividend, and a $10,000 cash dividend.Part IIThe 2-for-1 stock split doubles the number of shares outstanding from 1,000,000 to 2,000,000 and reduces the par value per share from one cent to one-half cent, but has no effect on any of the account balances in Stockholders’ Equity.Part IIIThe 100 percent stock dividend doubles the number of shares outstanding from 1,000,000 to 2,000,000, increases the Common Stock account from $10,000 to $20,000, and reduces Retained Earnings from $650,000 to $640,000.Part IVNotice that the cash dividend is the only distribution that decreases Total Stockholders’ Equity because it is the only one of the three that distributes the company’s resources to stockholders.
32Learning Objective 11-4Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Learning objective number 11-4 is to describe the characteristics of preferred stock and analyze transactions affecting preferred stock.
33Preferred Stock Issuance Priority over common stockPreferred StockUsually has a fixed dividend rateUsually has no voting rightsNational Beverage issued 10,000 shares of its $1 par value preferred stock for $5 per share.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash +50,000Preferred Stock ,000Additional Paid-InCapital Preferred ,000Part IPreferred stock is a separate class of stock that typically has priority over common stock in dividend distributions and distribution of assets in a liquidation, and is therefore less risky. Preferred stock usually has a stated dividend that is expressed as a percentage of its par value. Corporations may issue preferred stock to be able to raise needed capital without sacrificing control since preferred stock has no voting rights. Issuing preferred stock is a way to boost return to common stockholders. It is also a way to increase equity in the company if the common stock is perceived as too risky or has a lower than expected return.Part IINational Beverage issued 10,000 shares of its $1 par value preferred stock for $5 per share.Part IIIThe transaction would affect the accounting equation by increasing Assets (Cash) by $50,000 and increasing Stockholders’ Equity by $50,000 (Preferred Stock by $10,000 and Additional Paid-in Capital-Preferred by $40,000).Part IVTo record the transaction, we debit Cash for the market value of the stock issued: 10,000 shares times $5 per share. Next, we credit Preferred Stock for the total par value of the shares sold: 10,000 shares times $1 per share. And last, we credit Additional Paid-in Capital-Preferred for the excess of market value over par: $40,000.2Recorddr Cash (+A) (10,000 x $5)cr Preferred Stock (+SE) (10,000 x $1)cr Additional Paid-In Capital – Preferred (+SE)10,00040,00050,000
34Preferred Stock Dividends Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.Part IPreferred stock has a current dividend preference when compared to common stock. Current preferred dividends must be paid to preferred stockholders before any dividends are paid to common stockholders.Cumulative preferred stockholders have the right to be paid both the current and all prior periods’ unpaid dividends before any dividends are paid to common stockholders. When the preferred stock is cumulative and the directors do not declare a dividend to preferred stockholders, the unpaid dividend is called a dividend in arrears and must be disclosed in the financial statements.Part IINoncumulative preferred stock has no rights to prior periods’ dividends if they were not declared in those prior periods.If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.
35Preferred Stock Dividends Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in How much would the preferred and common stockholders receive in 2012 and 2013?Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in How much would the preferred and common stockholders receive in 2012 and 2013?
36Preferred Stock Dividends In each year, a fixed amount of the total dividends would first go to the preferred stockholders, and only the excess would go to the common stockholders. So each year the preferred stockholders would receive $2,400 which is the 2,000 shares times the $20 par value times the 6% dividend rate.Had Flavoria Company not declared dividends in 2012, preferred stockholders wouldhave had preference to $2,400 of dividends only in The current dividend preference does not carry over to later years unless the preferred stock is designated as cumulative, which is shown on the next slide.
37Preferred Stock Dividends Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and How much would the preferred and common stockholders receive in 2012 and 2013?Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and How much would the preferred and common stockholders receive in 2012 and 2013?
38Preferred Stock Dividends In 2012, dividends in arrears are satisfied first, followed by the current dividend preference, and the excess goes to common stockholders. So the preferred stockholders would receive $4,800 of dividends in arrears which is the same calculation as the last example but for 2 years instead of just 1. Then the preferred stockholders would also receive $2,400 for the current year’s dividend. The excess of $800 then goes to the common stockholders.In 2013, preferred dividends include only the current preference of that year because dividends in arrears were fulfilled in So therefore the preferred stockholders receive $2,400 for the current dividend with the remainder of $7,600 going to the common stockholders.
39Retained EarningsTotal cumulative amount of reported net income less any net losses and dividends declared since the company started operating.Baker CompanyComparative Balance Sheets (Partial)For Year Ended December 31Stockholders’ EquityCommon StockAdditional Paid-in CapitalRetained Earnings (Deficit)Total Stockholders’ Equity2014$ 100,000750,00050,000900,0002013(70,000)780,000Part IRetained Earnings represents a corporation’s total earnings that have been retained in the business (rather than being distributed to stockholders). The balance in retained earnings increases each year that a company reports net income, and decreases each year that a company reports a net loss or declares cash or stock dividends. A negative balance in retained earnings is referred to as an Accumulated Deficit.Part IIBaker Company incurred a loss of $120,000 in 2013 that resulted in an Accumulated Deficit in Retained Earnings.Baker Company incurred a loss of $120,000 in 2013 that resulted in an Accumulated Deficit in Retained Earnings.
40Learning Objective 11-5Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.Learning objective number 11-5 is to analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.
41Earnings Per Share (EPS) Earnings per share is probably the single most widely watched financial ratio.Net IncomeAverage Number of Common Shares OutstandingEPS =National Beverage’s income for 2011 was $40,800,000 and the average number of shares outstanding during the year was 46,200,000.Part IEarnings per share is one of the most widely used ratios. It is calculated by dividing Net Income by the average number of common shares outstanding.Part IINational Beverage’s income for 2011 was $40,800,000 and the average number of shares outstanding during the year was 46,200,000.Part IIINational Beverage earned $0.88 for each share of common stock outstanding. Earnings per share is calculated by dividing Net Income of $40,800,000 by the 46,200,000 shares of Common Stock.$40,800,00046,200,000 SharesEPS == $0.88 per share
42Return on Equity (ROE)Return on equity is the amount earned for each dollar invested by stockholders.Net IncomeAverage Stockholders’ EquityROE =National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’ Equity was $110,950,000.Part IAnother widely used financial ratio is return on equity, which tells us the amount earned for each dollar invested by stockholders. Return on equity is calculated by dividing Net Income by average Stockholders’ Equity.Part IINational Beverage’s income for 2011 was $40,800,000 and the average Stockholder’s Equity was $110,950,000.Part IIIReturn on equity for National Beverage is 38.6 percent, calculated by dividing net income of $40,800,000 by average stockholders’ equity of $110,950,000. Return on Equity tells us that National Beverage Corporation earned 36.8 cents for each dollar of its Stockholders’ Equity.$40,800,000$110,950,000ROE == percent
43Price/Earnings (P/E) Ratio The P/E ratio is a measure of the value that investors place on a company’s common stock.Current Stock Price (per share)Earnings Per Share (annual)P/E =National Beverage’s stock price was $15.10 when the company reported its 2011 EPS of $0.88.Part IThe P/E ratio is a measure of the value that investors place on a company’s common stock. It is calculated by dividing the current stock price per share by the annual earnings per share.Part IINational Beverage’s stock price was $15.10 when the company reported its 2011 EPS of $0.88.Part IIINational Beverage Corporation’s P/E ratio is The P/E ratio tells us that investors are willing to pay 17.2 times the current year’s earnings for a share of National Beverage Corporation’s common stock.$ 15.10$ 0.88P/E ==
44Comparison of EPS, ROE, and P/E Ratios On your screen, you see a comparison of EPS, ROE, and P/E ratio for National Beverage Corporation and Pepsico. National Beverage Corporation’s higher ROE in 2011 arises because it has successfully used a strategy called financial leverage. Rather than rely on equity financing to expand its business, National Beverage Corporation relied on debt financing. National Beverage Corporation was able to generate more profit from using these borrowed funds than it incurred for interest on the debt. As a result, National Beverage Corporation generated a superior return on equity for stockholders.
45Owners’ Equity for Other Forms of Business Supplement 11AOwners’ Equity for Other Forms of BusinessSupplement 11A: Owners’ Equity for Other Forms of Business.
46Owner’s Equity for a Sole Proprietorship Only two owner’s equity accounts.A Capital account to record the owner’s investments and the periodic income or loss.A Withdrawal account to record the owner’swithdrawals of assets.A sole proprietorship has only two owner’s equity accounts.A Capital account to record the owner’s investments and the periodic income or loss.A Withdrawal account to record the owner’s withdrawals of assets. The Withdrawal account is closed to the capital account at the end of each period.No separate retained earnings account.Closed to the capital account at the end of each period.
47Accounting for Owner’s Equity for a Sole Proprietorship To record a $150,000 investment by H. Simpson, the owner.Part IH. Simpson invests $150,000 into his business. The investment is recorded by debiting Cash and crediting Capital for $150,000.Part IIH. Simpson withdraws $1,000 per month from his business. The monthly withdrawal is recorded by debiting Drawings and crediting Cash for $1,000 each month.To record H. Simpson’s $1,000 monthly withdrawal.
48Accounting for Owner’s Equity for a Sole Proprietorship To close revenue and expense accounts to capital.Part IAll revenue and expense accounts are closed to H. Simpson’s Capital account at the end of the accounting period.Part IIH. Simpson’s Drawings account is closed to his Capital account at the end of the period by debiting Capital and crediting Drawings.To close the $1,000 monthly drawings to capital.
49Accounting for Partnership Equity Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as any other form of business.Accounting for partners’ equity follows the same pattern as for a sole proprietorship.When a partnership is formed each partner may contribute both assets and liabilities to the partnership. Contributed assets increase partner’s capital and liabilities decrease partner’s capital. Assets are normally recorded at fair market value and liabilities are recorded at the amount payable. Each partner may be entitled to withdraw cash or other assets from the partnership. A withdrawal reduces the partner’s Capital account.Separate Capital and Drawings accounts are maintained for each partner.
50Accounting for Partnership Equity To record investments by partners Able and Baker who will divide net income as follows: Able, 60 percent and Baker 40 percent.Part IAble and Baker form a partnership by investing $60,000 and $40,000 respectively. They will divide profits in the ratio of their initial investments. The investments are recorded by debiting Cash for $100,000 and crediting Able’s Capital account for $60,000 and crediting Baker’s Capital account for $40,000.Part IIAble and Baker withdraw $1,000 and $650, respectively, each month. The monthly withdrawals are recorded by debiting Able’s Drawings account for $1,000, debiting Baker’s drawings account for $650, and crediting Cash for $1,650 each month.To record the partners’ monthly withdrawal.
51Accounting for Partnership Equity To close revenue and expense accounts to partners’ capital.Part IAll revenue and expense accounts are closed to the partners’ Capital accounts in the agreed upon ratio at the end of the accounting period. Able’s Capital account is credited for 60 percent of the $30,000 partnership profit, and Baker’s Capital account is credited for 40 percent of the $30,000 partnership profit.Part IIThe partners’ drawing accounts are closed to their Capital accounts at the end of the period by debiting Capital and crediting Drawings.To close the monthly drawings to partners’ capital.
52Limited Liability Partnership (LLP) Limited Liability Company (LLC) Other Business FormsLimited Liability Partnership (LLP)Protects innocent partners from malpractice or negligence claims.Most states hold all partners personally liable for partnership debts.Limited Liability Company (LLC)Owners have same limited liability feature as owners of a corporation.A limited liability company typically has a limited life.Partners may form a limited liability partnership, or LLP. An LLP protects innocent partners from malpractice or negligence claims brought against an offending partner. In most states individual partners are personally liable for the debts of the partnership. Partners may wish to consider forming a limited liability company, or LLC. In an LLC, individual owners have limited liability, but the company typically has a limited life defined in the agreement.
54M11-4 Analyzing and Recording the Issuance of Common Stock To expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash +50,000Common Stock ,000Additional Paid-InCapital ,000Part IM11-4 Analyzing and Recording the Issuance of Common StockTo expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.Part IIThe asset account, Cash, will be increased by $50,000. The Stockholders’ Equity account Common Stock will be increased by $1,000 and the Stockholders’ Equity account Additional Paid-in Capital will be increased by $49,000.Part IIIWe debit the asset account Cash for $50,000, we credit the Stockholders’ Equity accounts Common Stock for $1,000 and Additional Paid-in Capital for $49,000.2Recorddr Cash (+A)cr Common Stock (+SE)cr Additional Paid-In Capital (+SE)1,00049,00050,000
55M11-4 Analyzing and Recording the Issuance of Common Stock Would your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+Cash +50,000Common Stock +2,000Additional Paid-InCapital ,000Part IWould your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.Part IIThe effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ. The asset account, Cash, will be increased by $50,000. The Stockholders’ Equity account Common Stock will be increased by $2,000 and the Stockholders’ Equity account Additional Paid-in Capital will be increased by $48,000.Part IIIWe debit the asset account Cash for $50,000, we credit the Stockholders’ Equity accounts Common Stock for $2,000 and Additional Paid-in Capital for $48,000.2Recorddr Cash (+A)cr Common Stock (+SE)cr Additional Paid-In Capital (+SE)2,00048,00050,000
56M11-8 Determining the Amount of a Dividend Netpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid?Dividends are paid on shares that are issued and outstanding. Dividends are not paid on treasury stock.Shares issuedLess treasury stockShares outstandingDividend per shareTotal dividends paid270,000100,000170,000x $$170,000Part IM11-8 Determining the Amount of a DividendNetpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 dollar per share of common stock. What is the total amount of the dividend that will be paid?Part IIDividends are paid on shares that are issued and outstanding. Dividends are not paid on treasury stock.Part IIIThere are 170,000 shares outstanding (270,000 issued less 100,000 treasury shares). The total dividend paid is $170,000 (170,000 shares times $1.00 per share).